Your Financial Health Depends On Getting The Right Home Mortgage

WhatYouDon’tKnowWillCostYou…BigTime There ought to be a warning label on mortgages: “These rates and terms could be hazardous to your financial health.” That’s because most people shopping for mortgages think that they are as simple to buy as airline tickets. You go online, search for the names of the companies that advertise the most on the […]

WhatYouDon’tKnowWillCostYou…BigTime

There ought to be a warning label on mortgages: “These rates and terms could be hazardous to your financial health.” That’s because most people shopping for mortgages think that they are as simple to buy as airline tickets. You go online, search for the names of the companies that advertise the most on the radio like Quicken Loans, put in your information, and three minutes later, blast-off—you’ve got your mortgage.

The results aren’t as immediate
as the commercials make it seem, as homebuyers still have to go through the
typical loan process of communicating back and forth with representatives and
sharing documentation and information. The problem with the process portrayed
by commercials is that it essentially encourages people to not shop around for their
mortgage. What often happens as a result is that the terms you receive may well
be worse—or even far worse—than what you could have gotten had you done things
the right way. That’s not a huge issue if you’re buying an airline ticket from
New York to Los Angeles. But the ramifications of making a bad choice on a
mortgage can haunt you for the next 30 years.

So how do you do it the right way? Mat Ishbia, President and CEO of United Wholesale Mortgage, the largest non-bank mortgage lender in America, in terms of purchase volume, offers consumers four counterintuitive thoughts about how to get the best mortgage. He shared those thoughts with me in a recent phone interview.

1. It’s cheaper to use the
middleman.

Most people think that they
will get the best rates and terms by dealing directly with a large bank or
retail lender such as Quicken Loans. The
reality is that you’ll always get the best deal by going through a middleman,
an independent
mortgage broker.

“This is one area of life where
you want to work with the middleman,” Ishbia says. “Your bank and the radio
advertisers are not going to shop around on your behalf. The middleman will.
Whatever else you’re buying, you get the best deal if you go get it yourself.
But with home mortgages, it’s exactly the opposite. The middleman gets you the
best deal every time and has access to wholesale rates, which are oftentimes
lower than what someone can get by going directly to a retail lender.”

For instance, you can get a
mortgage at Quicken Loans with a lower interest rate and cheaper closing costs
by going through a mortgage broker than you can by going directly to Quicken.
Specifically, looking at a snapshot of rates on December 11, 2018, Quicken’s
retail rate for a 30-year conventional loan at $200,000 was 5.125%. Meanwhile,
a borrower could get that same $200,000, 30-year conventional loan from
Quicken, through a mortgage broker, at a 4.75% interest rate. Breaking down
numbers to comparing payment differences and finances charges between the two
options, you would save nearly $32,000 over the life of the loan by getting
your Quicken Loans mortgage through a mortgage broker, than by going to
directly to Quicken.

The same company would
ultimately be servicing your loan, but mortgage brokers have access to
discounted wholesale pricing – and that savings is passed down to the borrower.

2. Never put down 20%.

“Everybody tells you to avoid
PMI, the insurance you have to buy if you make less than a 20% down payment on
a home,” Ishbia says. “Counter intuitively, you actually get a better rate if
you only put down 3% or 4% or 5%. First, you get to keep that 15% that you
would have put down—that’s cash that stays in your pocket. You can invest it.
You can buy furniture with it. You can do whatever you want with it. But once
you put it into the house purchase, the only way you get it back is by
borrowing it from the bank. Why not just keep it in your pocket?

“Most people are afraid of
spending on PMI. But it’s actually a minuscule amount compared with how much
cash you get to keep. And remarkably, Fannie Mae and Freddie Mac actually see
loans with PMI as less risky than loans without it. This means that you end up
getting a better rate if you put down 3% or 4% or 5% than you would if you put
down 20%. Most people never realize that.”

3. Don’t make interest rates
your top priority.

“I know it sounds crazy,”
Ishbia says. “But your focus should not be on interest rates. Instead, it
should be your monthly payment. Don’t say, ‘I want to buy that house for
$350,000 and I want to put 20% down.’ That’s backward. Instead, figure out how
much you can afford each month on your monthly payment.”

4. Get your mortgage lined up
before you start home shopping.

“What normally happens,” Ishbia
says, “is that people start looking at houses, find something they love, and
then struggle to figure out how to pay for it. The smarter option is to get
your mortgage lined up first. That way, you know just how much you’ll be
putting down, just how much you can afford, and what your monthly payments will
be. Otherwise, emotion will be driving the bus, and that’s the easiest way to
drive your personal finances over a cliff. No house is worth the lack of sleep
you’ll have wondering how you’re going to pay for it!”

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